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NEW MARKET DYNAMICS DRIVING DEMAND FOR FREIGHT FUTURES
Two new ocean freight futures products underpinned by well-known industry indices that have emerged over the last two weeks seek to succeed where past efforts to provide hedging tools to shippers, forwarders, and carriers have failed. The indices enter the fray in a market turned upside down by ocean freight capacity shortages driven by a demand surge and equipment dislocation that has sucked away as much as 20 percent of effective vessel capacity. Both the new indices are based on freight rate data from companies — Freightos and Xeneta — that didn’t exist the last time there was an effort to drive usage of ocean freight derivatives. That initiative, pushed primarily by Morgan Stanley and futures broker Freight Investor Services (FIS) in the wake of the global economic crisis in 2010, fell flat due to a lack of interest from both container lines and shippers. FIS is also involved in the FBX-based futures option. Container lines didn’t want to participate as they saw derivatives devaluing their business in a high-capital expenditure, low-margin industry, while shippers largely didn’t see value in hedging against rate volatility when ocean freight costs were relatively low. But that picture has changed markedly since the onset of the COVID-19 pandemic. Rate levels, both contract and spot, have mushroomed in 2021 with little sign of easing in 2022. Service levels, measured in sailing schedule reliability and the availability of containers at port, have declined, creating a double whammy for supply chain managers to explain to their C-suites. As freight costs have risen, and the need to carry more inventory to account for longer transit times for shipments has grown, shippers and forwarders are increasingly more open to tools that help them hedge risk against a sea of uncertainty, principals with the Baltic Exchange told JOC.com this week. The Baltic Exchange produces the Freightos Baltic Index (FBX) in tandem with Freightos, operator of an online international freight marketplace. FIS said in a statement Dec. 17 it will offer container freight rate futures on the Chicago Mercantile Exchange (CME), one of the largest futures and commodities exchanges in the world. The daily price of the futures contract will settle against the FBX. Meanwhile, Xeneta, a provider of rate benchmarking for shippers and forwarders, earlier this month partnered with financial index provider Compass Financial Technologies to provide a freight-all-kinds (FAK) index based on short-term ocean contracts. Xeneta said in a Dec. 9 statement that its index with Compass, called XSI-C, more accurately reflects what shippers pay for ocean freight. “Many legacy indices do not reflect the large-scale trades made by some of the biggest companies in the world,” Xeneta said in the statement. “They are mainly based on quoted prices, which are disproportionately indicative. Xeneta works with some of the largest shippers in the world, so XSI’s data is not only timely but also relevant.” XSI-C rates are available for a 40-foot container on eight main trade corridors, calculated and published daily, with rate validities of less than 32 days. The FBX-CME futures contracts are available for a 40-foot container on six lanes, with a launch date of Feb. 28. Little experience in hedging Shippers in charge of freight capacity procurement are generally not experienced in using hedging tools, a fact that has hindered demand for previous derivative and futures products, Bjorn Vang Jensen, vice president of advisory services/global supply chain at SeaIntelligence Maritime Analysis, wrote in a LinkedIn post about the FBX-CME contracts. “Remember, people who buy freight are, as a rule, not knowledgeable about derivatives and futures,” he wrote. “Another failure point last time is that people actually thought this was going to save them money. [Sellers of futures contracts] will need to explain very carefully, and in big, bold, red letters, what ‘hedge’ means.” Jensen acknowledged that broader ocean market dynamics have changed, but questioned whether those changes would be enough to stir genuine demand for futures contracts.